Valuation Dashboard: Utilities - Update

| About: Utilities Select (XLU)
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Summary

Valuation metrics in Utilities.

Evolution since last month.

A list of stocks cheaper than their pairs.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry and gives a list of 10 stocks. I update every month 8 lists like this one covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published as part of free-access articles.

Executive summary

For months, Utilities have been one of the 2 most overvalued sectors regarding historical average ratios (with Energy). The recent rally has driven overpricing a bit farther. However, the group of Independent Power Producers / Energy Traders stands out and looks relatively cheap, with a profitability (measured by ROE) slightly below the baseline. All other industries in Utilities are very overpriced, with a profitability close to historical averages.

Since last month:

  • P/E has deteriorated in all industries across the sector.
  • P/S has improved in Water Utilities and deteriorated elsewhere.
  • ROE has improved in Water Utilities and deteriorated in Independent Power Producers and Gas Utilities.
  • The SPDR Select Sector ETF (NYSEARCA:XLU) has outperformed the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) by more than 2%.
  • In this period, the 5 best-performing S&P 500 Utilities stocks are American Water Works Company Inc. (NYSE:AWK), Consolidated Edison Inc. (NYSE:ED), NiSource Inc. (NYSE:NI), NRG Energy Inc. (NYSE:NRG) and SCANA Corp (NYSE:SCG).

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings and Price/Sales. The 10 companies with the highest Return on Equity are included in the final selection.

This strategy rebalanced monthly has an annualized return about 10.76% for a 17-year backtest. XLU has an annualized return of only 5.98% for the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

EIX

Edison International

UTILELECTRIC

HE

Hawaiian Electric Industries Inc.

UTILELECTRIC

PCG

PG&E Corp.

UTILELECTRIC

SO

Southern Co. (The)

UTILELECTRIC

NJR

New Jersey Resources Corp.

UTILGAS

SWX

Southwest Gas Holdings Inc.

UTILGAS

UGI

UGI Corp.

UTILGAS

WGL

WGL Holdings Inc.

UTILGAS

DTE

DTE Energy Co.

UTILMULTI

AWR

American States Water Co.

UTILWATER

Detail of Valuation and Quality indicators in Utilities on 6/17/2017

I take 3 aggregate industry factors provided by Portfolio123: Price/Earnings (P/E), Price/Sales (P/S), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 3 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

P/E

Avg

D- P/E

P/S

Avg

D- P/S

ROE

Avg

D-ROE

Electric Utilities

21.68

15.94

-36.01%

2.39

1.22

-95.90%

9.04

10.43

-1.39

Gas Utilities

28.88

17.24

-67.52%

2.1

0.97

-116.49%

9.45

11.49

-2.04

Multi-Utilities

21.91

16.59

-32.07%

2.12

0.95

-123.16%

10.54

9.48

1.06

Water Utilities

31.11

23.68

-31.38%

7.66

3.94

-94.42%

7.97

7.96

0.01

Independent Power Producers / Energy Traders*

38.5

34.9

-10.32%

2.67

4.16

35.82%

-9.05

-5.15

-3.9

* Averages since 2005

The following charts give an idea of the current status of two valuation factors (P/E, P/S) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below, higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of XLU with SPY in 1 month.

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Data provided by Portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.